can modi deliver? sunil jain managing editor the financial express september 2014

Can Modi deliver?

Sunil JainManaging Editor

The Financial ExpressSeptember 2014

Electoral Maths

• Modi has a majority in the Lok Sabha• But not in the Rajya Sabha• Can pass Bills through a joint session if others

don’t agree but cumbersome• Even if Modi wins elections in Haryana and

Maharashtra, future Rajya Sabha strength won’t change for a few years

• Ally hunt is expensive as BSP/SP have huge demands – but don’t need too many legislative changes in short run

What did we want Modi to do?

SHORT TERM• Fix the tax terror• Fix the subsidies, move to Aadhar-based

cash transfers• Raise prices of natural gas• Provide more telecom spectrum … the last

two would bring in immediate investments, $15-18bn in oil and $10-12bn in telecom

• Rein in food inflation


SHORT TERM• Stop FCI’s open-ended procurement …

democratize agriculture• Clean up agriculture markets• Approve a bank holding company• Privatise PSUs• Bring in GST• Change centre-state relations


SHORT TERM• Raise FDI limits in insurance• Raise FDI limits in defence• Allow FDI in B2C e-commerce, live with

FDI in retail• Join a JPMorgan-type bond index


LONGER TERM• Fix labour laws• Fix the UPA’s bad land acquisition law• Scrap the coal mining and other laws that

keep commercial miners out• Fix the fisc• Fix the Doing Business kind of indicators


LONGER TERM• Bring in the Direct Tax Code• Clean up tax exemptions• Make sure states clean up electricity sector

… use the FRP leverage• Work on PPP framework/laws to fix the

current problem of PPP paralysis• Allow RBI to clean up banking

How has Modi done?

100 DAYS

Lots of mis-steps• Ordinance to clear first appointment, and

a bad one at that• Very small Cabinet, fight over Shourie • WTO bungle• Onions etc on Essential Commodities List• Not raising of natural gas prices

How has Modi done?

100 DAYS

Lots of mis-steps• Lacklustre budget … fiscal numbers the

only bright light, numbers look very iffy• Half a solution on tax terror• No action on subsidies, not even small

hikes in LPG prices• Planned to offload 5mn tonnes of rice, and

through the PDS … limited impact

How has Modi done?

100 DAYS

Or just bad delivery• GST hasn’t happened as states have got

even more aggressive• Insurance Bill referred to Standing Comm• Fight on FTAs and on SEZs continues• Limited overhaul of Land Act seems likely• Plans to pump more money into PSUs

How has Modi done?

100 DAYS

And rank populism?• Jan Dhan Yojana• The poor have first right on India’s treasury …

Modi repeated this often• GM trials put off after RSS pressure• Defence FDI limited to 49%, a non-starter• ARCs for roads and power … loud

thinking/bad idea

But let’s join the dots

100 DAYS

Note: Some of this is really wishful thinking!• Fiscal numbers can optically be made up by

aggressive PSU sales … SUUTI shares • Expenditure management panel • Inelegant tax solution ... can work, may not• Fisc targets not achievable without a

spectrum solution, so this will happen

But let’s join the dots• Some progress on limiting FCI’s open-ended

procurement in ‘bonus’ states, FCI panel set up for longer-term reforms

• Just ended mandi cartel in Delhi with new farmer mandis coming up by Oct/Nov. Plan to offload 10mn tonnes of wheat … open market

• Labour reform left to the states sensibly, but let’s wait for Rajasthan law to pass

• Talking of coal price pooling ... But let’s wait for gas to happen, not hopeful but will know by Sept 30

But let’s join the dots• By all account, Aadhar-based cash transfers

on anvil, will be JanDhan’s pivot• Diesel is effectively deregulated, of course

that’s a UPA scheme• Talk of gas grids is a good idea as it lowers

effective subsidies since NG is cheaper than LPG

• Clearing defence deals to attract FDI• FDI allowed in Railways, not operations

But let’s join the dots

• Doubling of worker definition in Factories Act has exempted half of factories from it

• Essentially, Modi is trying to fix the huge hike in ICOR over the past few years, from 4.4 in FY04-11 to 7.4 in FY12-14 … in short run, this is the best solution

• All told, a pretty good 100 days if you forgive the lack of talk of the big picture by the government

The next 3 months

Some more wishful thinking!• Lot will depend on Finance Comm – and

Centre’s recco to it in a few weeks – but centre-state relations could fundamentally change under Modi

• Expenditure Panel interim report will be in, so some action on targeting subsidy. Need to slash expenditure as Pay Comm also coming next year

The next 3 months

• Will probably continue to bungle on gas prices unfortunately

• Will pass Rajasthan labour laws• Not too sure on Rajasthan land laws• Some more carve-outs in existing land law• Auction all scrapped coal blocks• Come up with a new policy for fixing SEBs

– not sure whether it will be better

The next 3 months

• Coal price pooling will be in place• Environment regulator will be in place,

making this a 24x7 process, more transparent

• Skilling initiative will be put in place• PPP India will be in place• Restructuring of FCI will begin

The next 3 months

• Will delist Vashi APMC if NDA wins Maharashtra elections

• Composite FII/FDI caps• More private airports• Clarity on Aadhar-based DBT and JanDhan

Yojana• Will decide on profit petroleum vs revenue

share in oil/gas … will fix oil sector if done

The next 3 months

• Will have decided on gas pricing …

if under $8.4, we have a problem• Will take a call on Kelkar panel

suggestion of moving to market price for gas

What’s worrying• Absence of any big-picture advisors to

work out the dynamics of policies … on WTO, on FCI,on gas and coal pricing … what will not allowing commercial mining do to BoP etc

• With no CEA, haven’t figured out whether CPI-based inflation targeting a good idea

• First budget without a CEA

What’s worrying

• Want to scrap Planning Commission without any alternative in mind. Also abolished Independent Evaluation Office

• Too much reliance on bureaucrats to come up with a solution

• Confident that ministers can come up with solution … Nitin Gadkari and roads MCA

What’s worrying• Government scared of big changes, hence

the half-moves on taxation (committee on retro tax is staffed by tax chaps!) and lack of desire to move ahead on opening up to commercial miners

• The RSS-BJP baggage: Not too happy with opening up, not convinced about this in areas like mining … bad idea … last big find in non-oil mining was 40 years ago

What’s worrying

• Fundamentally wary of markets, hence Modi panel report on banning futures

• Very statist approach. New aviation policy wants airlines to fly half their capacity in regional routes … of course, the way this is being done is innovative, and will give a fillip to smaller aviation firms … but why not just open up, leave it to markets?

What’s worrying

• Courts cancelling coal licenses• CBI filing cases against KM Birla,

PC Parakh, Pradip Baijal, KM Abraham, CB Bhave … terror of a different sort … how will you get bureaucrats to work?

What to watch for• Most of the action will happen in the states• Rajasthan has changed its labour law,

wants to do the same for land, wants to have all Rs 20,000 cr of annual expenditure on social schemes to go via banks based on Aadhar-cards

• Impressive road building programme• Madhya Pradesh has done a good job on

biometric cards and cash transfers

What to watch for

• Few states have reduced VAT rates on ATF and aviation has begun to take off here

• See if regional parties go along with Modi’s PM-CM partnership … will they vote with him on a changed land law?

What to watch for

• What kind of powers RBI will get• If not enough powers, can’t clean up bank

balance sheets, so RBI needs to be able to force banks to force India Inc to deleverage

• Have done SMA, SMA1, need to put group exposure norms in place

• Rajan’s attempt to complete ‘missing markets’

What to watch for

• Will be a lot more action in infrastructure like smart cities etc

• A lot will, of course, depend on how the new PPP framework comes up

• Will govt move on acre-based cash transfers to farmers

• Will RSS dominate Modi

Why we’re positive

• Modi is focussed on the nitty gritty– Solar Power Gujarat story– Kisan Mandi Delhi– Open market wheat sales after rice flopped– Article 254(2)– LARR consultation– Factories Act– Coal price pooling– Clearing defence deals to attract investors

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Thank you

can modi deliver? sunil jain managing editor the financial express september 2014

Documents

psus slide

banking slide

short run slide

indias treasury modi

electoral maths modi

pds limited impact slide

short term raise fdi

tax terror